UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
000-49620
(Commission file number)
COBALIS CORP.
-------------
(Exact name of small business issuer as specified in its charter)
Nevada 91-1868007
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2445 McCabe Way, Suite 150, Irvine, California 92614
(Address of principal executive offices)
(949) 757-0001
--------------
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes[ ] No[X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 11, 2005 25,972,964
shares of common stock
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
COBALIS CORP.
Index
Page
Number
PART I. FINANCIAL INFORMATION 2
Item 1. Financial Statements 2
Consolidated Balance Sheet as of September 30, 2005 (unaudited) 2
Consolidated Statements of Operations for the
three and six months ended September 30, 2005 and 2004 (unaudited) 3
Consolidated Statements of Stockholders' Deficit for the
six months ended September 30, 2005 (unaudited) 4
Consolidated Statements of Cash Flows for the
six months ended September 30, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations 13
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Cobalis Corp. and Subsidiary
(formerly Biogentech Corp.)
(A Development Stage Company)
Consolidated Balance Sheet
September 30,
2005
------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 300
------------------
TOTAL CURRENT ASSETS 300
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $87,574 26,046
WEBSITE DEVELOPMENT COSTS, net of accumulated amortization of $32,662 1,945
PATENTS, net of accumulated amortization of $251,783 653,532
DEPOSIT 40,000
------------------
TOTAL ASSETS $ 721,823
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash overdraft $ 13,503
Accounts payable 358,545
Accrued expenses 2,010,512
Due to related parties 3,873,530
Advances from stockholders 260,000
Warrant liability 5,377
Convertible notes payable 700,000
------------------
TOTAL CURRENT LIABILITIES 7,221,467
CONVERTIBLE PREFERRED STOCK (dividends on arrears of $150,000) 885,000
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' DEFICIT
Common stock; $0.001 par value; 50,000,000 shares
authorized; 25,427,964 shares issued and outstanding 25,428
Additional paid-in capital 12,772,993
Deficit accumulated during the development stage (20,183,065)
------------------
TOTAL STOCKHOLDERS' DEFICIT (7,384,644)
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 721,823
==================
The accompanying notes are an integral part of these
consolidated financial statements.
3
COBALIS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Cobalis Corp. and Subsidiary
(formerly Biogentech Corp.)
(A Development Stage Company)
Consolidated Statements of Operations
Three Months Ended Six Months Ended Cumulative from
--------------------------- ------------------------- November 21,
September 30 September 30 September 30 September 30 2000 (inception) to
2005 2004 2005 2004 September 30, 2005
------------ ------------ ------------ ----------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
NET SALES $ - $ 120 $ - $ 479 $ 5,589
COST OF SALES - 1,810 - 2,930 31,342
------------ ------------ ------------ ----------- -----------------
GROSS PROFIT (LOSS) - (1,690) - (2,451) (25,753)
------------ ------------ ------------ ----------- -----------------
OPERATING EXPENSES:
Professional fees 447,182 730,501 958,360 943,460 6,543,146
Salary and wages 95,653 47,391 178,220 122,895 2,153,998
Rent expense 34,487 35,458 68,923 67,644 485,286
Marketing and research 29,043 10,895 55,316 11,793 2,300,688
Depreciation and amortization 21,401 20,973 46,283 41,947 480,648
Impairment expense - - - - 2,331,522
Other operating expenses 182,735 57,920 288,612 136,623 1,409,924
------------ ------------ ------------ ----------- -----------------
TOTAL OPERATING EXPENSES 810,501 903,138 1,595,714 1,324,362 15,705,212
------------ ------------ ------------ ----------- -----------------
LOSS FROM OPERATIONS (810,501) (904,828) (1,595,714) (1,326,813) (15,730,965)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (225,635) (826,219) (408,367) (1,027,588) (3,913,202)
Change in fair value of warrant liability 777 (125,397) 26,342 (54,919) 346,102
------------ ------------ ------------ ----------- -----------------
TOTAL OTHER INCOME (EXPENSE) (224,858) (951,616) (382,025) (1,082,507) (3,567,100)
------------ ------------ ------------ ----------- -----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,035,359) (1,856,444) (1,977,739) (2,409,320) (19,298,065)
PROVISION FOR INCOME TAXES - - - - -
------------ ------------ ------------ ----------- -----------------
NET LOSS (1,035,359) (1,856,444) (1,977,739) (2,409,320) (19,298,065)
PREFERRED STOCK DIVIDENDS 18,750 18,750 37,500 37,500 1,035,000
------------ ------------ ------------ ----------- -----------------
NET LOSS ATTRIBUTED TO COMMON STOCKHOLDERS $(1,054,109) $(1,875,194) $(2,015,239) $(2,446,820) $ (20,333,065)
============ ============ ============ =========== =================
NET LOSS PER SHARE:
BASIC AND DILUTED $ (0.04) $ (0.09) $ (0.08) $ (0.11) $ (1.03)
============ ============ ============ =========== =================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED 25,232,801 21,814,842 25,035,886 21,529,330 19,756,288
============ ============ ============ =========== =================
The accompanying notes are an integral part of these
consolidated financial statements.
4
COBALIS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Cobalis Corp. and Subsidiary
(formerly Biogentech Corp.)
(A Development Stage Company)
Consolidated Statements of Stockholders' Deficit
For the Period From November 21, 2000 (inception) to September 30, 2005
(unaudited)
Deficit
accumulated Total
Additional during the stockholders'
Common stock paid-in Deferred development equity
Shares Amount capital compensation stage (deficit)
--------- --------- ----------- ----------- ---------- ------------
Balance at inception (November 21, 2000) - $ - $ - $ - $ - $ -
Issuance of founder's shares in exchange
for property and equipment 16,300,000 16,300 - - - 16,300
Issuance of common stock for cash - November 2000 @ $1.00 30,000 30 29,970 - - 30,000
Issuance of common stock for cash - December 2000 @ $1.00 15,000 15 14,985 - - 15,000
Issuance of common stock for cash - February 2001 @ $1.00 12,000 12 11,988 - - 12,000
Issuance of common stock for cash - March 2001 @ $1.00 125,000 125 124,875 - - 125,000
Issuance of common stock for services - March 2001 @ $1.00 10,000 10 9,990 - - 10,000
Contributed capital - - 62,681 - - 62,681
Net loss for the period from inception
(November 21, 2000) to March 31, 2001 - - - - (223,416) (223,416)
--------- --------- ----------- ----------- ---------- ------------
Balance at March 31, 2001, as restated 16,492,000 16,492 254,489 - (223,416) 47,565
Issuance of common stock for cash - April 2001 @ $1.00 10,000 10 9,990 - - 10,000
Issuance of common stock for telephone equipment -
April 2001 @ $1.00 6,750 7 6,743 - - 6,750
Issuance of common stock for cash - May 2001 @ $1.00 11,000 11 10,989 - - 11,000
Issuance of common stock for website development -
May 2001 @ $1.00 17,000 17 16,983 - - 17,000
Issuance of common stock for legal services -
May 2001 @ $1.00 1,000 1 999 - - 1,000
Issuance of common stock for cash - June 2001 @ $1.00 23,500 24 23,476 - - 23,500
Issuance of common stock for cash - July 2001 @ $1.00 20,000 20 19,980 - - 20,000
Issuance of common stock for cash - August 2001 @ $1.00 25,000 25 24,975 - - 25,000
Issuance of common stock for services, related party -
September 2001 @ $1.00 65,858 66 65,792 - - 65,858
Issuance of common stock for cash - September 2001 @ $1.00 15,000 15 14,985 - - 15,000
Issuance of common stock for services - September 2001 @1.00 11,000 11 10,989 - - 11,000
Issuance of stock options for services - September 2001 - - 32,000 - - 32,000
Issuance of common stock for cash - October 2001 @ $1.00 5,000 5 4,995 - - 5,000
Issuance of common stock for cash - December 2001 @ $1.00 30,000 30 29,970 - - 30,000
Issuance of common stock for services -
December 31, 2001 @ $1.00 33,000 33 32,967 - - 33,000
Issuance of common stock for services, related party -
December 2001 @ $1.00 117,500 118 117,382 - - 117,500
Issuance of common stock for prepaid advertising -
December 2001 @ $1.00 15,600 15 15,585 - - 15,600
Issuance of common stock for property and equipment -
January 2002 @ $3.00 1,000 1 2,999 - - 3,000
Issuance of common stock for services, related party -
January 2002 @ $1.00 33,000 33 32,967 - - 33,000
Issuance of common stock for cash - February 2002 @ $2.00 20,000 20 39,980 - - 40,000
Issuance of common stock for cash - March 2002 @ $2.00 12,500 12 24,988 - - 25,000
Contributed capital - - 211,269 - - 211,269
Deferred compensation - - - (60,108) - (60,108)
Net loss - - - - (1,144,249) (1,144,249)
--------- --------- ----------- ----------- ---------- ------------
Balance at March 31, 2002, as restated 16,965,708 16,966 1,005,492 (60,108)(1,367,665) (405,315)
Issuance of common stock for services - April 2002 @ $2.00 3,000 3 5,997 - - 6,000
Issuance of common stock for cash - April 2002 @ $1.00 10,000 10 9,990 - - 10,000
Issuance of common stock for cash - April 2002 @ $2.00 17,500 17 34,983 - - 35,000
Issuance of common stock for cash - May 2002 @ $1.00 10,000 10 9,990 - - 10,000
Issuance of common stock for cash - May 2002 @ $2.00 16,000 16 31,984 - - 32,000
Issuance of stock options for services - May 2002 - - 350,000 - - 350,000
Contributed capital - bonus expense - - 50,000 - - 50,000
Issuance of common stock for cash - June 2002 @ $1.00 5,000 5 4,995 - - 5,000
Issuance of common stock for cash - June 2002 @ $2.00 5,000 5 9,995 - - 10,000
Issuance of common stock for cash - July 2002 @ $1.00 5,000 5 4,995 - - 5,000
Issuance of common stock for cash - August 2002 @ $2.00 10,000 10 19,990 - - 20,000
Issuance of common stock for cash - September 2002 @ $2.00 10,000 10 19,990 - - 20,000
Issuance of stock options below fair market value -
November 2002 - - 250,000 (250,000) - -
Issuance of common stock for conversion of note -
December 2002 @ 2.00 50,000 50 99,950 - - 100,000
Issuance of common stock for cash - December 2002 @ $2.00 20,000 20 39,980 - - 40,000
Issuance of common stock for services - December 2002 @ 2.00 15,000 15 29,985 - - 30,000
Issuance of common stock for patents - December 2002 $2.00 2,000,000 2,000 1,285,917 - - 1,287,917
Contributed capital 292,718 - - 292,718
Issuance of common stock for exercise of options -
December 2002 574,000 574 574,028 - - 574,602
Deferred compensation 60,108 60,108
Contributed capital 5,000 - - 5,000
Issuance of common stock for services - January 2003 25,000 - - 25,000
Issuance of common stock for cash February 2003 @ $2.00 11,500 12 22,988 - - 23,000
Issuance of common stock for cash March 2003 @ $2.00 5,000 5 9,995 - - 10,000
Deferred compensation 54,000 - 54,000
Net loss - (2,148,008) (2,148,008)
--------- --------- ----------- ----------- ---------- ------------
Balance at March 31, 2003, as restated 19,732,708 19,733 4,193,962 (196,000)(3,515,673) 502,022
Issuance of common stock for cash April 2003 @ $2.00 70,000 70 139,930 - - 140,000
Issuance of common stock for cash May 2003 @ $2.00 30,000 30 59,970 - - 60,000
Acquisition by Biogentech Corp of ("Togs for Tykes") 1,032,000 1,032 (101,032) - - (100,000)
Issuance of common stock for penalties January 2004
@ $2.80 135,000 135 377,865 - - 378,000
Issuance of common stock for services February 2004
@ $2.20 100,000 100 219,900 - - 220,000
Issuance of common stock for services February 2004
@ $1.85 20,000 20 36,980 - - 37,000
Value of beneficial converstion feature of convertible
debenture issued in September 2003 346,870 - - 346,870
Fair value allocated to warrant liability for detachable
warrants issued with preferred stock (181,849) - - (181,849)
Dividend on preferred stock 885,000 - (885,000) -
Deferred compensation - 196,000 - 196,000
Net loss - (5,703,639) (5,703,639)
--------- --------- ----------- ----------- ---------- ------------
Balance at March 31, 2004 21,119,708 21,120 5,977,596 -(10,104,312) (4,105,596)
Issuance of common stock for penalties May 2004
@ $1.85 170,000 170 314,330 - - 314,500
Issuance of common stock for services June 2004
@ $1.75 10,000 10 17,490 - - 17,500
Issuance of common stock for conversion of debt
June 2004 @1.60 371,317 371 593,736 - - 594,107
Issuance of common stock for services July 2004
@ $1.35 7,489 8 10,101 10,109
Issuance of common stock for services July 2004
@ $1.10 75,000 75 82,425 82,500
Issuance of common stock for services August 2004
@ $0.75 100,000 100 74,900 75,000
Conversion of debt to common stock September 2004
@ $2.22 857,143 857 1,902,000 1,902,857
Issuance of common stock for services October 2004
@ $2.20 4,758 5 10,463 10,468
Issuance of common stock for services October 2004
@ $2.55 375,000 375 955,875 956,250
Issuance of common stock for services December 2004
@ $1.45 5,000 5 7,245 7,250
Issuance of common stock for services December 2004
@ 1.30 63,676 63 82,715 82,778
Issuance of common stock for services January 2005
@ $1.05 1,250 1 1,312 1,313
Issuance of common stock for services January 2005
@ $1.18 75,000 75 88,425 88,500
Issuance of common stock for services February 2005
@ $1.10 155,000 155 170,345 170,500
Issuance of common stock for services February 2005
@ $1.06 100,000 100 105,900 106,000
Issuance of common stock for services February 2005
@ $0.95 30,000 30 28,470 28,500
Issuance of common stock for services February 2005
@ $1.05 80,628 81 84,578 84,659
Issuance of common stock for services February 2005
@ $1.00 467,159 467 466,692 467,159
Issuance of common stock for services February 2005
@ $0.96 350,000 350 335,650 336,000
Issuance of common stock for financing costs March 2005
@ $0.81 50,000 50 40,450 40,500
Issuance of common stock for services March 2005
@ $0.80 5,000 5 3,995 4,000
Issuance of common stock for services March 2005
@ $0.75 120,000 120 89,880 90,000
Issuance of common stock for services March 2005
@ $0.68 37,500 38 25,462 25,500
Fair value of warrants issued to consultants 553,715 553,715
Net loss (8,101,014) (8,101,014)
--------- --------- ----------- ----------- ---------- -----------
Balance at March 31, 2005 24,630,628 24,631 12,023,750 - (18,205,326) (6,156,945)
Cancelation of common stock previously issued (105,000) (105) (113,895) (114,000)
Issuance of common stock for services April 2005
@ $0.59 100,000 100 58,900 59,000
Issuance of common stock for services April 2005
@ $0.62 162,500 162 100,587 100,749
Issuance of common stock for services May 2005 @
$0.60 39,836 40 23,862 23,902
Issuance of common stock for services June 2005 @
$0.65 110,000 110 71,390 71,500
Issuance of common stock for services June 2005 @
$0.45 200,000 200 89,800 90,000
Issuance of common stock for services July 2005 @
$0.60 10,000 10 5,990 6,000
Issuance of common stock for services July 2005 @
$0.61 125,000 125 76,125 76,250
Issuance of common stock for interest July 2005 @
$0.61 50,000 50 30,450 30,500
Cancelation of common stock previously issued (150,000) (150) (143,850) (144,000)
Issuance of common stock for services August 2005 @
$0.48 100,000 100 47,900 48,000
Issuance of common stock for services September 2005 @
$0.50 30,000 30 14,970 15,000
Issuance of common stock for services September 2005 @
$0.42 50,000 50 20,950 21,000
Issuance of common stock for services September 2005 @
$0.50 75,000 75 37,425 37,500
Amortization of fair value of warrants issued to consultants 428,639 428,639
Net loss (1,977,739) (1,977,739)
--------- --------- ----------- ----------- ---------- ------------
Balance at September 30, 2005 25,427,964 $ 25,428 $12,772,993 $ - $(20,183,065)$(7,384,644)
========= ========= =========== =========== ========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
Cobalis Corp. and Subsidiary
(formerly Biogentech Corp.)
(A Development Stage Company)
Consolidated Statements of Cash Flows
Six Months Ended Cumulative from
---------------------------- November 21,
September 30,September 30, 2000 (inception) to
2005 2004 September 30, 2005
------------- ------------- -------------------
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,977,739) $ (2,409,320) $ (19,298,065)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 46,283 41,947 480,648
Common stock issued for services 290,901 185,109 3,499,245
Common stock issued for penalty - 314,500 692,500
Common stock issued for financing costs 30,500 - 71,000
Change in value of warrant liability (26,342) 54,919 (346,102)
Amortization of debt issue costs - 13,942 83,500
Exercise of stock options for services - - 26,960
Amortization of discounts on notes - 492,137 790,128
Issuance of stock options/warrants for services 428,639 184,067 1,389,354
Capital contribution - bonus (related party) - - 50,000
Amortization of prepaid advertising - - 15,600
Amortization of deferred compensation - - 250,000
Discount on common stock issued for settlement of debt - - 50,000
Impairment expense - - 2,331,522
Changes in assets and liabilities: -
Prepaid expenses and other assets - 10,111 -
Inventory - - 6,250
Accounts payable 31,726 294,827 766,935
Accrued expenses (197,572) 287,935 2,698,369
Amounts due to related parties 278,802 150,841 1,716,642
------------- ------------- -------------------
Net cash used in operating activities (1,094,802) (378,985) (4,725,514)
------------- ------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - - (87,569)
Increase in patent costs - - (24,711)
Change in restricted cash - - -
Merger fees and costs - - -
Increase in acquisition deposits - - (2,220,000)
Increase in other deposits - - (40,000)
Increase in capitalized website - (3,532) (18,097)
------------- ------------- -------------------
Net cash used in investing activities - (3,532) (2,390,377)
------------- ------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdraft 1,562 - 13,503
Payment on contract - - (161,000)
Proceeds from advances - related party 817,500 353,000 3,142,449
Proceeds from advances from stockholders 310,000 - 310,000
Proceeds from issuance of notes payable - - 1,215,000
Proceeds from sale of common stock - - 806,500
Proceeds from sale of preferred stock - - 885,000
Proceeds from convertible debenture 100,000 - 700,000
Capital contribution - - 571,668
Payment of debt issue costs - - (83,500)
Payments on advances from stockholders (50,000)
Payments on advances - related party (85,129) (15,500) (233,429)
------------- ------------- -------------------
Net cash provided by financing activities 1,093,933 337,500 7,166,191
------------- ------------- -------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (869) (45,017) 50,300
CASH AND CASH EQUIVALENTS, Beginning of period 1,169 76,181 -
------------- ------------- -------------------
CASH AND CASH EQUIVALENTS, End of period $ 300 $ 31,164 $ 50,300
============= ============= ===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ - $ - $ -
============= ============= ===================
Income taxes paid $ - $ - $ -
============= ============= ===================
The accompanying notes are an integral part of these
consolidated financial statements.
6
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared by Cobalis
Corp. (the "Company"), pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes for the year ended March 31,
2005 included in the Company's Annual Report on Form 10-KSB. The results of the
six months ended September 30, 2005 are not necessarily indicative of the
results to be expected for the full year ending March 31, 2006.
Going Concern
-------------
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred a net loss of $1,977,739 for the six months ended September
30, 2005 and as of September 30, 2005; the Company had a working capital deficit
of $7,221,167 and a stockholder deficit of $7,384,644. In addition, as of
September 30, 2005, the Company has not developed a substantial source of
revenue. These conditions raise substantial doubt as to the Company's ability to
continue as a going concern. These consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
These consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company is currently attempting to raise additional debt and equity
financing for operating purposes and expects to begin selling its product in
Australia, New Zealand, Indonesia, Europe and other territories in 2006. The
Company is also attempting to partner with a large pharmaceutical company for
research and development, marketing and distribution of its products.
The Company requires substantial capital to pursue its operating strategy, which
includes commercialization of its products, and currently has limited cash for
operations. Until the Company can obtain revenues sufficient to fund working
capital needs and additional research and development costs necessary to obtain
the regulatory approvals for commercialization, the Company will be dependent
upon external sources of financing.
There can be no assurances that sufficient financing will be available on terms
acceptable to the Company, or at all. If the Company is unable to obtain such
financing, the Company will be forced to scale back operations, which could have
an adverse effect on the Company's financial condition and results of
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
Management believes that actions presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern.
7
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
Stock Options
-------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current
intrinsic value accounting method specified in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account
for stock-based compensation. The Company has elected to use the intrinsic value
based method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation issued to employees.
For options granted to employees where the exercise price is less than the fair
value of the stock at the date of grant, the Company recognizes an expense in
accordance with APB 25. For non-employee stock based compensation the Company
recognizes an expense in accordance with SFAS No. 123 and values the equity
securities based on the fair value of the security on the date of grant. For
stock-based awards the value is based on the market value for the stock on the
date of grant and if the stock has restrictions as to transferability a discount
is provided for lack of tradability. Stock option awards are valued using the
Black-Scholes option-pricing model.
The pro forma information regarding the effects on operations that is required
by SFAS 123 and SFAS 148 are not presented since there is no pro forma expense
to be shown for the three months and six months ended September 30, 2005 and
2004.
Patent Costs
------------
Patent costs are carried at cost less accumulated amortization, which is
calculated on a straight-line basis, over the estimated economic life of the
patent. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company evaluates intangible assets and other long-lived assets (including
patent costs) for impairment, at least on an annual basis and whenever events or
changes in circumstances indicate that the carrying value may not be recoverable
from its estimated future cash flows. Recoverability of intangible assets and
other long-lived assets is measured by comparing their net book value to the
related projected undiscounted cash flows from these assets, considering a
number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book value
of the asset exceeds the related undiscounted cash flows, the asset is
considered impaired, and a second test is performed to measure the amount of
impairment loss. During the year ended March 31, 2004, the Company recognized an
impairment expense of $111,522 related to one of its patents as it determined
that this patent had no future value based on its assessment of expected future
cash flows to be generated by this patent and the results of an independent
appraisal done in April 2004. Amortization expense related to these patents for
the six months ended September 30, 2005 and 2004 and the period from November
21, 2000 (inception) to September 30, 2005 was $26,932, $26,932, and $360,412,
including $108,629 of amortization expense related of the impaired patent,
respectively. Projected amortization expense approximates $54,000, $49,000,
$49,000, $49,000 and $49,000, respectively, for each of the five years ended
March 31, 2010. Weighted average life of the remaining patent approximated 16.2
years.
NOTE 2 - LOSS PER SHARE
The Company reports loss per share in accordance with SFAS No. 128, "Earnings
per Share." Basic loss per share is computed by dividing loss available to
common shareholders by the weighted average number of common shares available.
Diluted loss per share is computed similar to basic loss per share except that
8
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. Diluted loss per share has
not been presented since the effect of the assumed exercise of options and
warrants to purchase common shares would have an anti-dilutive effect. There
were 6,094,167 and 5,594,167 common equivalent shares outstanding related to the
options and warrants at September 30, 2005 and 2004, respectively. In addition,
as of September 30, 2005, 716,667 shares of common stock are issuable upon the
conversion of the convertible note payable and convertible preferred stock.
NOTE 3 - PROPERTY AND EQUIPMENT
The cost of property and equipment at September 30, 2005 consisted of the
following:
Furniture and fixtures $ 71,500
Office equipment 42,120
--------------
113,620
Less accumulated depreciation and amortization (87,574)
--------------
$ 26,046
==============
NOTE 4 - ACCRUED EXPENSES
Accrued expenses at September 30, 2005 consisted of the following:
Accrued clinical trials payable $ 642,998
Accrued penalties payable 902,000
Accrued interest payable 225,722
Accrued legal settlement 140,000
Accrued legal fees 25,000
Other 74,792
--------------
$ 2,010,512
==============
NOTE 5 - DUE TO RELATED PARTIES
Due to related parties at September 30, 2005 consists of the following:
R&R Holdings, Inc. and affiliate a) $ 3,563,321
Chaslav Radovich b) 93,750
Other officers/executives c) 216,459
--------------
$ 3,873,530
==============
a) On January 1, 2001, the Company entered into a consulting contract with R&R
Development, Inc. DBA R&R Holdings, Inc. and its affiliate, Silver Mountain
Promotions, Inc. ("R&R") whereby they would provide managerial consulting
services to the Company at the rate of $125,000 per year and the rate was
increased to $135,000 per year. R&R is also a shareholder of the Company and the
controlling shareholder of R&R is Mr. Radul "Rudy" Radovich, the Company's
Chairman. As of September 30, 2005, the Company had accrued $411,142 of
consulting fees relating to this agreement.
9
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
R&R advances the Company cash from time to time. As of September 30, 2005, the
Company owed R&R $2,148,421 related to these advances. The St. Petka Trust,
which is controlled by Mr. Radul Radovich, also advances the Company cash from
time to time. As of September 30, 2005, the Company owed St. Petka Trust
$527,000 related to these advances. The Company has accrued interest on these
advances at a rate of 10% per annum. Accrued interest at September 30, 2005
related to these advances totaled $267,588.
In September 2003, R&R advanced the Company an additional amount of $170,000 at
the rate of 10% per annum. These funds were specifically to provide the Company
with additional financing with regard to the InnoFood transaction. Accrued
interest at September 30, 2005 related to this advance was $39,170.
b) The Company currently owes its Chief Executive Officer $93,750 in past due
compensation. The Company is accruing salary to its CEO at an annual rate of
$125,000.
c) The Company currently owes other current and former executives $103,334 and
$113,125, respectively, in past due compensation.
NOTE 6 - ADVANCES FROM STOCKHOLDERS
At September 30, 2005, one stockholder advanced the Company $260,000. These
advances are non-interest bearing, unsecured and payable upon demand.
NOTE 7 - CONVERTIBLE NOTES PAYABLE
Gryphon Master Fund, LP
-------------------------
In September 2003, the Company sold a $600,000, three-year, 8% convertible note
payable to Gryphon Master Fund, LP, which is convertible into shares of the
Company's common stock at the initial conversion price of $2.00 per share. This
price is subject to adjustment should the Company issue shares of its common
stock at a price less than $1.75 per share. The convertible note payable was
sold with detachable three-year warrants to purchase 90,000 shares of the
Company's common stock at $2.88 per share. The warrant exercise price is also
subject to adjustment based on sales of the Company's common stock below the
current fair market value on the contract date.
The fair value of these warrants totaling $169,630 was computed using the
Black-Scholes model under the following assumptions: (1) expected life of 3
years; (2) volatility of 104%, (3) risk free interest of 4.39% and (4) dividend
rate of $0%. In addition, since this debt is convertible into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and amortized using the
effective interest method over the life of the debt in accordance with Emerging
Issues Task Force No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments." Since the intrinsic value of the beneficial conversion
feature and relative fair value of the warrants exceeds the proceeds of the
convertible debt, the amount of the discount assigned to the beneficial
conversion feature and warrants is limited to the amount of the net proceeds of
the convertible debt. Therefore, the Company recorded a discount of $516,500
(consisting of relative fair value of the warrants of $169,630 and beneficial
conversion features of $346,870), the net proceeds received by the Company after
the debt discount of $83,500. During the year ended March 31, 2005, the Company
fully amortized the debt discount associated with the $600,000 convertible note
payable due to the lawsuit filed by the holder of the convertible note payable.
10
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
The Company also entered into a registration rights agreement whereby the
Company agreed to file a valid registration statement with the Securities and
Exchange Commission to register the shares of common stock underlying the
Convertible Debentures and Debenture Warrants. Pursuant to EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock", the relative fair value of the warrants has
been recorded as a short-term liability until the Company has obtained an
effective registration statement for these shares. If the Company does not file
such an effective registration statement within 30 days of the closing date, or
October 8, 2003, the Company is subject to penalties as follows: 1% of the
principal amount of the funding for the first 30 day period in which the Company
fails to file such registration statement, and 2% for each 30 day period
thereafter. At September 30, 2005, the Company had not filed such a registration
statement and accordingly is currently subject to a penalty of approximately
$282,000.
In addition, the Company is required to report a value of the warrant as a fair
value and record the fluctuation to the fair value of the warrant liability to
current operations. During six months ended September 30, 2005, the decrease of
the relative fair value of the warrants approximated $11,364. The relative fair
value of the warrants approximated $2,332 as of September 30, 2005.
Per the terms of the note agreement, in the event of default, the Company is
subject to accrue interest at a default rate of 18% from the date of the
default. As of September 30, 2005, Company had accrued interest of $222,805
related to this convertible note payable. In addition, the Company is obligated
to remit 125% of the outstanding note balance or $150,000 upon the acceleration
of repayment by the holder.
This convertible debenture is presented in the accompanying balance sheet as a
current liability as the Company has not made required interest payment on this
convertible debenture which is an event of default that give the holder the
right to call the convertible debenture.
Tejeda and Tejeda, Inc.
-----------------------
On June 13, 2005, the Company entered into a loan agreement with Tejeda and
Tejeda, Inc. in the amount of $100,000. The loan is due on or before the
12-month anniversary and accrues interest at the rate of 10% per annum. The note
is personally guaranteed by Mr. Radul Radovich, the Company's Chairman, and Mr.
Chaslav Radovich the Company's CEO. On the 12-month anniversary, the holder of
the note may elect to convert the loan into shares of the Company's common stock
at $1.75 per shares or at a price equal to a 25% discount to the closing bid
price on the day of conversion at maturity. If such conversion is elected, the
loan shall be considered paid in full. The loan is convertible at the maturity,
which is the date at which the conversion feature will become beneficial;
therefore the intrinsic value of the beneficial conversion feature of
approximately $25,000 will be calculated at the commitment date using the stock
price as of that date. The amount will be recorded as interest expense at the
date of conversion, if the loan is converted to shares of common stock.
11
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
NOTE 8 - CONVERTIBLE PREFERRED STOCK
In September 2003, the Company sold 1,000 shares of its 7.5% convertible
preferred stock to Gryphon Master Fund, LP for $1,000,000, less direct issuance
costs of $115,000, which were netted against the proceeds of the offering. The
Convertible Preferred Stock carries voting rights equivalent to the number of
shares of common stock into which it can be converted, and has liquidation
preference of $1,000 per share. The Convertible Preferred Stock is convertible
into shares of the Company's common stock at the initial conversion price of
$2.40 per share. This price is subject to change should the Company issue shares
of its common stock at a price less than $1.75 per share. Included with the
Convertible Preferred Stock were detachable three-year warrants to purchase
104,167 shares of the Company's common stock at the price of $2.90 per share.
The warrant exercise price is also subject to adjustment based on sales of the
Company's common stock below the current fair market value on the contract date.
Since the intrinsic value of the beneficial conversion feature and relative fair
value of the warrants exceeds the proceeds of the convertible preferred stock,
the amount of the discount assigned to the beneficial conversion feature and
warrants is limited to the amount of the proceeds of the convertible preferred
stock. The discount was recorded as a preferred stock dividend at the date of
issuance. The Company recognized $885,000 of preferred dividends related to the
discount.
Pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock", the relative fair value
of the warrants, has been recorded as a short-term liability until the Company
has obtained an effective registration statement for these shares.
If the Company does not file such an effective registration statement within 30
days of the closing date, or October 25, 2003, the Company is subject to
penalties as follows: 1% of the value of the shares and the warrants paid by the
purchaser for the first 30 day period in which the Company fails to file such
registration statement, and 2% for each 30 day period thereafter. At September
30, 2005, the Company has not filed such a registration statement and
accordingly is currently subject to a penalty of $470,000.
In addition, the Company is required to report a value of the warrant as a fair
value and record the fluctuation to the fair value of the warrant liability to
current operations. During the six months ended September 30, 2005, the decrease
of the relative fair value of the warrants was $14,978. The relative fair value
of the warrants was $3,045 as of September 30, 2005.
As of September 30, 2005, there was $150,000 of dividends in arrears related to
the 1,000 share of convertible preferred stock.
NOTE 9 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, entitled Inventory Costs -- An
Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No.
43, Chapter 4, entitled Inventory Pricing [June 1953], to clarify the accounting
for "abnormal amounts" of idle facility expense, freight, handling costs, and
wasted material [spoilage]. Before revision by SFAS No. 151, the guidance that
existed in ARB No. 43 stipulated that these type items may be "so abnormal" that
the appropriate accounting treatment would be to expense these costs as incurred
[i.e., these costs would be current-period charges]. SFAS No. 151 requires that
these type items be recognized as current-period charges without regard to
whether the "so abnormal" criterion has been met. Additionally, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
adoption of SFAS 151 did not impact the consolidated financial statements.
12
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
In December 2004, the FASB issued SFAS No. 152, entitled Accounting for Real
Estate Time-Sharing Transactions -- An Amendment of FASB Statements No. 66 and
67. SFAS No. 152 amends SFAS No. 66 to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position 04-2. SFAS No. 152 also amends SFAS No. 67 to state
that the guidance for (a) incidental operations and (b) costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions.
The accounting for those operations and costs is subject to the guidance of SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. The adoption of SFAS 152 did not impact the
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, entitled Exchanges of
Nonmonetary Assets -- An Amendment of APB Opinion No.29. SFAS No. 153 amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The adoption of SFAS 153 did
not impact the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised), entitled Share-Based
Payment. This revised Statement eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in SFAS No. 123
as originally issued. Under Opinion 25, issuing stock options to employees
generally resulted in recognition of no compensation cost. This Statement
requires entities to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards. For public companies that file as a small business issuer, this
Statement is effective as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The adoption of SFAS 123
(Revised) will not impact the consolidated financial statements as the Company
has not granted any equity instruments to employees.
In May 2005, the FASB issued SFAS No. 154, entitled Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3. This
Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. Opinion 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
This Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement defines retrospective application as the application of a
different accounting principle to prior accounting periods as if that principle
had always been used or as the adjustment of previously issued financial
statements to reflect a change in the reporting entity. This Statement also
redefines restatement as the revising of previously issued financial statements
to reflect the correction of an error. The adoption of SFAS 154 did not impact
the consolidated financial statements.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements ("EITF 05-6") EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material effect on its consolidated financial position or results of operations.
13
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
NOTE 10 - LITIGATION
Gryphon Master Fund, LP v. Cobalis Corp.: On November 8, 2004, the Gryphon
Master Fund, LP filed a lawsuit against the Company in United States District
Court, Northern District of Texas, Dallas Division. The lawsuit seeks repayment
of the $600,000 convertible note payable, accrued interest on the convertible
note payable, penalties for failing to register the shares underlying the
conversion of the convertible note payable, attorney fees and court costs.
Lease Dispute: In March 2003, the Company vacated its office space. The landlord
then filed suit against the Company in the County of Orange, Superior Court of
California, for unpaid rent. The Company believes that the landlord breached the
agreement and, as such, the Company does not believe it owes any unpaid rent. In
October 2004 a judgment against the Company was reached in the amount of unpaid
rent of approximately $45,000 plus the plaintiff's attorney fees and expenses of
approximately $95,000. The Company has accrued a liability of $140,000 for this
matter.
In the ordinary course of business, the Company is generally subject to claims,
complaints, and legal actions. At September 30, 2005, management believes that
the Company is not a party to any action which would have a material impact on
its financial condition, operations, or cash flows.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF
MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT
ESTIMATE THE HAPPENING OF FUTURE EVENTS ARE NOT BASED ON HISTORICAL FACT.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY, SUCH AS "MAY", "SHALL", "COULD", "EXPECT", "ESTIMATE",
"ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR
SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN
COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND
CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS,
HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY
IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN
THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT
TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND
OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA
AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM
AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE
EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY
FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED
ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
BioGentec Incorporated ("BG"), a private Nevada corporation, was incorporated on
November 21, 2000 according to the laws of Nevada, under the name St Petka, Inc.
On May 4, 2001, St Petka, Inc. formally changed its name to BioGentec
Incorporated. On July 2, 2003, BG was merged into Togs for Tykes Acquisition
Corp. ("TTAC"), a wholly owned subsidiary formed for the purpose of acquiring
BG. On July 6, 2004, BioGentech Corp. changed its name to Cobalis Corp. As
allowed under SFAS 141, "Business Combinations" ("SFAS 141"), we designated a
date of convenience of the closing for accounting purposes as June 30, 2003.
Under the terms of the merger agreement, all of BG's outstanding common stock
(19,732,705 shares of $0.001 par value stock) was exchanged for 19,732,705
shares newly issued shares of $0.001 par value stock of Cobalis Corp. common
stock. This transaction was consummated with the filing of the Articles of
Merger with the State of Nevada on July 2, 2003. BG shareholders then
effectively controlled approximately 95% of the issued and outstanding common
stock of Cobalis. Since the shareholders of BG obtained control of Cobalis,
according to SFAS 141, this acquisition was treated as a recapitalization for
accounting purposes, in a manner similar to reverse acquisition accounting.
15
GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation as a going concern. We incurred a net
loss of $1,977,739 for the six months ended September 30, 2005 and as of
September 30, 2005, we had a working capital deficit of $7,221,167 and a
stockholder deficit of $7,384,644. In addition, as of September 30, 2005, we
have not developed a substantial source of revenue. These conditions raise
substantial doubt as to our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts, or amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.
We are currently attempting to raise additional debt and equity financing for
operating purposes and expect to begin selling our product in Australia, New
Zealand, Indonesia, Europe and other territories in 2006. We are also attempting
to partner with a large pharmaceutical company for research and development,
marketing and distribution of our product.
We require substantial capital to pursue our operating strategy, which includes
commercialization of our products, and we currently have limited cash for
operations. Until we can obtain revenues sufficient to fund working capital
needs and additional research and development costs necessary to obtain the
regulatory approvals for commercialization, we will be dependent upon external
sources of financing.
We believe that actions presently being taken to revise our operating and
financial requirements provide the opportunity for us to continue as a going
concern. There can be no assurances that sufficient financing will be available
on terms acceptable to us, or at all. If we are unable to obtain such financing,
we will be forced to scale back operations, which could have an adverse effect
on our financial condition and results of operations.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, accrued expenses,
financing operations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of our consolidated
financial statements include estimates as to the appropriate carrying value of
certain assets and liabilities which are not readily apparent from other
sources, primarily valuation of patent costs and stock-based compensation. The
methods, estimates and judgments we use in applying these most critical
accounting policies have a significant impact on the results we report in our
consolidated financial statements.
Patent Cost Valuation. The determination of the fair value of certain acquired
assets and liabilities is subjective in nature and often involves the use of
significant estimates and assumptions. Determining the fair values and useful
lives of intangible assets especially requires the exercise of judgment. While
there are a number of different generally accepted valuation methods to estimate
16
the value of intangible assets acquired, we primarily use the weighted-average
probability method outlined in SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This method requires significant management
judgment to forecast the future operating results used in the analysis. In
addition, other significant estimates are required such as residual growth rates
and discount factors. The estimates we have used are consistent with the plans
and estimates that we use to manage our business, based on available historical
information and industry averages. The judgments made in determining the
estimated useful lives assigned to each class of assets acquired can also
significantly affect our net operating results.
Stock-based Compensation. We record stock-based compensation to outside
consultants at fair market value in general and administrative expense. We do
not record expense relating to stock options granted to employees with an
exercise price greater than or equal to market price at the time of grant. We
report pro-forma net loss and loss per share in accordance with the requirements
of SFAS 123 and 148. This disclosure shows net loss and loss per share as if we
had accounted for our employee stock options under the fair value method of
those statements. Pro-forma information is calculated using the Black-Scholes
pricing method at the date of grant. This option valuation model requires input
of highly subjective assumptions. Because our employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of fair value of our employee
stock options.
Estimate of Litigation-based Liability. We are a defendant in certain claims and
litigation in the ordinary course of business. We accrue liabilities relating to
these lawsuits on a case-by-case basis. We generally accrue attorney fees and
interest in addition to the liability being sought. Liabilities are adjusted on
a regular basis as new information becomes available. We consult with our
attorneys to determine the viability of an expected outcome. The actual amount
paid to settle a case could differ materially from the amount accrued.
LIQUIDITY AND CAPITAL RESOURCES
We had a cash and cash equivalents of $300 at September 30, 2005. Our total
current assets at September 30, 2005 were equal to $300. We also had the
following long term assets: $26,046 in property and equipment, net, $1,945 in
net website development costs, and $653,532 represented by net value of our
patents, $40,000 in deposits. Our total assets as of September 30, 2005 were
$721,823.
Our total current liabilities were $7,221,467 at September 30, 2005, which was
represented by a cash overdraft of $13,503, accounts payable of $358,545,
accrued expenses of $2,010,512, due to related parties of $3,873,530, advances
from stockholders of $260,000, warrant liability of $5,377, and convertible
notes payable of $700,000. Our liabilities exceeded our assets by $6,499,644 as
of September 30, 2005.
We have financed our operations primarily through cash generated from related
party debt financing from advances from stockholders and from the private
placement sales of equity securities, as well as issuing convertible notes.
During the six months ended September 30, 2005, we received an additional
$732,371, net from a related party, $260,000, net from advances from two
stockholders and $100,000 from the issuance of a convertible note.
Our net cash provided by financing activities was $1,093,933 for the six months
ended September 30, 2005 compared to $337,500 for the same period in 2004. The
increase of $756,433 is primarily due to the proceeds received from related
party advances, advances from stockholder and the issuance of a convertible
note.
17
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004
REVENUES AND COST OF SALES
We had no significant revenues for the three months ended September 30, 2005 and
September 30, 2004 as we are undertaking a Phase III clinical trial in order to
obtain FDA approval of PreHistin (TM) as an over the counter drug. Our net
revenues were $0 less $0 for cost of sales for a gross loss of $0 for the three
months ended September 30, 2005 as compared net sales of $120 less $1,810 for
cost of sales for a gross loss of $1,690 for the three months ended September
30, 2004.
OPERATING EXPENSES
Our operating expenses for the three months ended September 30, 2005 were
$810,501 compared to $903,138 for the three months ended September 30, 2004. For
both periods, we incurred expenses for two major purposes: i) ongoing
development of our PreHistin (TM) product and related product management and ii)
general management and fund raising efforts. For the three months ended
September 30, 2005, this amount was represented by $21,401 in depreciation and
amortization, $447,182 in professional fees, $95,653 in salary and wages,
$34,487 in rent expense, $29,043 in marketing and research, and $182,735 in
other operating expenses, as compared to the three months ended September 30,
2004, where we had $20,973 in depreciation and amortization, $730,501 in
professional fees, $47,391 in salary and wages, $35,458 in rent expense, $10,895
in marketing and research, and $57,920 in other operating expenses. Our
operating expenses decreased during the three months ended September 30, 2005 as
compared to the three months ended September 30, 2004 principally as a result of
a decrease in professional fees, which include payments for accounting, legal
and shareholder relations.
Interest expense and financing costs for the three months ended September 30,
2005 were $225,635 compared to $826,219 for the three months ended September 30,
2004. The decrease is due to the write off of the discounts on convertible
debentures during the quarter ended September 30, 2004. As a result there was no
amortization taken in the quarter ended September 30, 2005.
The change in the fair value in the warrant liability relates to the decrease in
the value of the detachable warrants issued in connection with the convertible
note payable and convertible preferred stock. Due to the decrease of our stock
price, the fair value of these warrants has decreased resulting in the decrease
of the warrant liability.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 2004
REVENUES AND COST OF SALES
We had no significant revenues for the six months ended September 30, 2005 and
September 30, 2004 as we are undertaking a Phase III clinical trial in order to
obtain FDA approval of PreHistin (TM) as an over the counter drug. Our net
revenues were $0 less $0 for cost of sales for a gross loss of $0 for the six
months ended September 30, 2005 as compared net sales of $479 less $2,930 for
cost of sales for a gross loss of $2,451 for the six months ended September 30,
2004.
OPERATING EXPENSES
Our operating expenses for the six months ended September 30, 2005 were
$1,595,714 compared to $1,324,362 for the six months ended September 30, 2004.
For both periods, we incurred expenses for two major purposes: i) ongoing
development of our PreHistin (TM) product and related product management and ii)
general management and fund raising efforts. For the six months ended September
30, 2005, this amount was represented by $46,283 in depreciation and
18
amortization, $958,360 in professional fees, $178,220 in salary and wages,
$68,923 in rent expense, $55,316 in marketing and research, and $288,612 in
other operating expenses, as compared to the six months ended September 30,
2004, where we had $41,947 in depreciation and amortization, $943,460 in
professional fees, $122,895 in salary and wages, $67,644 in rent expense,
$11,793 in marketing and research, and $136,623 in other operating expenses. Our
operating expenses increased during the six months ended September 30, 2005 as
compared to the six months ended September 30, 2004 principally as a result of
the increase in other expenses, salaries and wages, and professional fees, which
include payments for accounting, legal and shareholder relations and an increase
in payroll. A significant portion of the professional fees were paid by issuing
shares of our stock. The value of these services was based on the market value
of our stock at the agreement date.
Interest expense and financing costs for the six months ended September 30, 2005
were $408,367 compared to $1,027,588 for the six months ended September 30,
2004. The decrease is due to the write off of the discounts on convertible
debentures during the quarter ended September 30, 2004. As a result there was no
amortization taken in the quarter ended September 30, 2005.
The change in the fair value in the warrant liability relates to the decrease in
the value of the detachable warrants issued in connection with the convertible
note payable and convertible preferred stock. Due to the decrease of our stock
price, the fair value of these warrants has decreased resulting in the decrease
of the warrant liability.
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS.
Over the next 12 months, we plan to continue moving forward with the completion
of the Phase III clinical trials of our allergy prevention product, PreHistin
(TM), followed immediately by submission of an application to the FDA for
marketing approval of PreHistin (TM) as an over the counter ("OTC") allergy
medication. We hope to receive approval from the FDA in 2006, enabling our
marketing launch in the United States of the product for the 2007 allergy
season. We estimate the cost to complete the Phase III clinical trials and the
submission of the application to the FDA for marketing approval will be
approximately $3,000,000.
While continuing with the US FDA approval process, we are working to finalize
the international launch strategy in the primary global markets. Discussions are
progressing with potential joint venture partners for marketing, manufacturing,
regulatory approval and distribution throughout the world, the most advanced of
which are with companies in Australia and Japan. In addition to seeking approval
from the FDA for the primary indication of seasonal allergic rhinitis (hay
fever) for PreHistin (TM), we plan to conduct additional studies to validate the
viability of approval for supplemental indications and alternative delivery
mechanisms. The tests will be a combination of clinical trials and laboratory
analyses.
In addition to seeking approval from the FDA for the primary indication of
seasonal allergic rhinitis (hay fever) for PreHistin (TM), we plan to conduct
additional studies to validate the viability of approval for supplemental
indications and alternative delivery mechanisms. The tests will be a combination
of clinical trials and laboratory analyses.
We are also actively pursuing the acquisition and development of products that
we hope will enable us to leverage our resources. Areas of focus are OTC
pharmaceutical products and nutritional supplements.
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As of September 30, 2005, we had a cash of $300. To fully execute our business
plan for the next 12 months, we will need to raise additional funds in order to
complete the Phase III clinical trials, submit the PreHistin (TM) application to
the United States FDA and execute a marketing launch of the PreHistin (TM)
product. We will also need to raise funds to execute studies for the further
development of the PreHistin (TM) product line and to complete the acquisition
of additional products. Along with our investment bankers, we plan to raise
these funds through private and institution or other equity offerings. We may
attempt to secure other loans from lending institutions or other sources. There
is no guarantee that we will be able to raise additional funds through offerings
or other sources. If we are unable to raise funds, our ability to continue with
product development will be hindered.
Other than the research and development related to our PreHistin (TM) product,
we do not plan to engage in any other research and development unless we are
able to raise additional funds. We do not anticipate any significant hiring over
the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
ITEM 3. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures at the end of the period
covered by this report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no changes in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 8, 2004, the Gryphon Master Fund, LP filed a lawsuit against us in
United States District Court, Northern District of Texas, Dallas Division. The
lawsuit seeks repayment of the $600,000 convertible note payable, accrued
interest on the convertible note payable, penalties for failing to register the
shares underlying the conversion of the convertible note payable, attorney fees
and court costs.
Lease Dispute: In March 2003, we vacated our office space. The landlord
then filed suit against us in the County of Orange, Superior Court of
California, for unpaid rent. We believe that the landlord breached the
agreement and, as such, we do not believe we owe any unpaid rent. In
October 2004 a judgment against us reached in the amount of unpaid
rent of approximately $45,000 plus the plaintiff's attorney fees and expenses of
approximately $95,000. We have accrued a liability of $140,000 for this
matter.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2005, we issued the following shares
of our unregistered common stock:
o 10,000 shares to Kathryn Tsang for services valued at $6,000;
o 125,000 shares to B.J.S. Consulting LLC for services valued at $76,250;
o 50,000 shares to Tejeda & Tejeda, Inc. for financing costs valued at
$30,500;
o 100,000 shares to Steve Barnes for services valued at $48,000;
o 30,000 shares to Kevin Pickard for services valued at $15,000;
o 50,000 shares to Tejeda and Tejeda, Inc. for services valued at $21,000;
o 50,000 shares to Jorge Tise for services valued at $25,000; and
o 25,000 shares to Melany Shivelman for services valued at $12,500.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We are currently in default on terms of our $600,000 convertible note payable to
Gryphon Master Fund LP, dated September 8, 2003, for failing to register the
shares underlying the conversion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
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ITEM 6. EXHIBITS
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REGULATION
S-B NUMBER EXHIBIT
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3.1 Articles of Incorporation (1)
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3.1.1 Certificate of Amendment to Articles of Incorporation (1)
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3.1.2 Certificate of Amendment to Articles of Incorporation (2)
----------- --------------------------------------------------------------------
3.1.3 Certificate of Amendment to Articles of Incorporation (3)
----------- --------------------------------------------------------------------
3.2 Bylaws (1)
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4.1 Convertible Note with Gryphon Master Fund LP (4)
----------- --------------------------------------------------------------------
10.1 Asset Purchase Agreement between BioGentec Inc., (fka St. Petka,
Inc.) and Gene Pharmaceuticals, LLC, (fka Allergy Limited, LLC,) as
amended (4)
----------- --------------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
and Chief Financial Officer of the Company (5)
----------- --------------------------------------------------------------------
32.1 Section 906 Certification by Chief Executive Officer and Chief
Financial Officer (5)
----------- --------------------------------------------------------------------
(1) Incorporated by reference to the exhibits to the registrant's registration
statement on Form 10-SB filed on February 8, 2002.
(2) Incorporated by reference to the exhibits to the registrant's information
statement on schedule 14C filed on June 10, 2003.
(3) Incorporated by reference to the exhibits to the registrant's current report
on Form 8-K, filed July 8, 2004.
(4) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the fiscal year ended March 31, 2004.
(5) Included herein.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COBALIS CORP.
November 21, 2005 By: / s/ Chaslav Radovich
---------------------------------------------
Chaslav Radovich
Principal Executive Officer, President,
Treasurer, Secretary, Director